How to deal with Fake Invoices under GST?

Taking Precautionary Measures to Deal with Fake Invoices under GST

To effectively tackle these frauds, it is important to establish a system that can identify suspicious entities at an early stage and promptly detect GST frauds. This is especially crucial because many of these fraudsters tend to operate by impersonating dummy individuals who lack real assets, making it extremely difficult to recover any money from them if the fraud is discovered later on. To address this, the following safeguards are recommended as key elements of risk profiling to prevent such GST frauds:

1) Scrutinizing and verifying registered taxpayers through risk profiling to identify fraudsters involved in fake invoices at an early stage. Verify GSTIN via IRIS Peridot App and confirm the authenticity of the taxpayer.

2) Focusing on sectors that have historically been prone to tax evasion.

3) Maintaining a database of offenders involved in fraud to prevent them from re-entering the system.

4) Considering certain risk indicators associated with these individuals or their activities, such as:

• Having multiple registrations under the same PAN (Permanent Account Number).
• Sharing common email addresses, mobile numbers, addresses, authorized signatories, or promoters.
• Allowing individuals whose registration application was rejected or whose registration was canceled to reapply.
• Noting live registrations under the same PAN within the CGST jurisdiction where an offense has been reported by the SGST authorities.

By implementing these measures and conducting comprehensive risk profiling, authorities can enhance their ability to detect and prevent GST frauds, ensuring a more robust and trustworthy tax system.

Identifying fake invoices under GST and how to deal with them

The standard operating procedure for detecting and tackling fake invoice fraud in GST involves several steps. Here is a simplified explanation of the process:

1. Identification

The first step is to identify entities involved in generating fake invoices. Risk parameters are used to identify these entities, such as:

• Multiple GSTIN registrations for one address or PAN.
• Incomplete or incorrect addresses used for GSTIN.
• Taxpayers dealing with sensitive commodities.
• Common email addresses, mobile numbers, addresses, authorized signatories, or promoters for multiple GSTINs.
• Mismatch between declared premises and volume of goods transacted.
• Mismatch between transaction details in GST returns and e-way bills generated.
• PAN involved in any “fake invoice” or other GST frauds appearing in GSTR1A or GSTR 2A.
• Abnormal utilization of Input Tax Credit (ITC), such as above 95%

2. Investigation

The aim of the investigation is to establish that there was an actual supply of goods or services by the supplier who issued the fake invoices under GST. This involves steps such as:

• Conducting searches of declared premises to prove the lack of or inadequate manufacturing facilities.
• Checking indicators like electricity and water consumption that don’t match the declared quantity of goods manufactured.
• Lack of facilities and space to handle the traded goods.
• Suppliers of invoices have no premises for dealing with the goods.
• Non-existence of required inputs, input services, or valid clearances/licenses/permissions.
• Lack of necessary agreements between entities.
• Absence of e-way bills.
• Fake vehicle numbers shown in e-way bills or invoices.
• Comparing details provided to other agencies like Income Tax and Registrar of Companies.
• Cross-referencing vehicle details with records from the Regional Transport Office (RTO).

What needs to be done after detection of a fake invoice under GST?

Once the investigation is complete and a Show Cause Notice (SCN) or other penal actions are issued, it is important to take preventive measures to ensure that the same entities do not engage in the same fraudulent activity again.

This can be achieved through the following steps:

1. Creation of an offence database in the GST Application:
   This database will flag the GSTIN of entities involved in “fake invoice” or other frauds. It will enable automatic identification of buyers associated with these entities, and officers will receive alerts for further verification.
2. Handling re-registration differently:
   In cases where registration is canceled, the re-registration process should be treated differently. Such applications should raise alerts for concerned officers, and deemed registration should not be allowed. Physical verification should be mandatory in such cases.
3. Identifying entities that availed ITC based on fake invoices:
   It is crucial to identify these entities and recover the unlawfully claimed ITC as per the law. Sample-based analysis of their previous transactions with other entities should also be conducted.
4. Provisional attachment of property and bank accounts:
   Section 83 of the CGST Act, 2017, along with Rule 159 of the CGST Rules, 2019, provide provisions for the provisional attachment of property, including bank accounts. These provisions should be invoked in such cases.
5. Criminal involvement of Directors:
   If there are indications of criminal involvement by Directors in GST evasion, Section 89 of the CGST Act, 2017, read with Section 83, allows for the attachment of bank accounts and properties of Directors.
6. Blocking ITC of the entities and their beneficiaries:
   To prevent these entities from obtaining undue credit, it is necessary to block the Input Tax Credit (ITC) of such persons, including their beneficiaries falling under the jurisdiction of other GST authorities.

Implementing these actions will help deter repeat offenders, recover unlawfully claimed ITC, attach assets if required, and block undue credit, thereby ensuring the integrity of the GST system.

Combatting fake invoices under the GST regime in India is crucial to maintaining the integrity of the tax system and ensuring a fair playing field for businesses. By understanding the nature of fake invoices, adopting preventive measures, leveraging technology, and collaborating with tax authorities and law enforcement agencies, businesses can effectively protect themselves and contribute to the fight against this fraudulent practice.